One of the major changes we made to our budgeting strategy after learning the YNAB method was “living on last month’s income.” And boy has it been a game-changer!
What is living on last month’s income?
In traditional budgeting methods, people assign amounts to spending categories according to the money they expect to earn that month. With the YNAB method, you only budget money you actually have.
In the beginning, this will mean that with each paycheck you will decide what expenses that paycheck needs to cover until you get paid next. When the next paycheck comes, you decide what the next priorities are. You will be allocating funds to your budget categories each time you get a paycheck.
The goal is to get to the point where all the money that you are budgeting (and spending) this month is money that was earned last month. The progression continues that the money you earn this month will be used for next month’s budget.
I’ll talk more about how to start living on last month’s income in a minute. First I want to tell you why it’s awesome!
Benefits of living on last month’s income
The money to pay bills is already available. There’s no need to check account balances and worry about whether you can pay the bills before your next paycheck comes in. Since the numbers in your budget represent actual money, when you assign $100 to car insurance at the beginning of the month, the money is just sitting there waiting for you to use when the bill comes due.
You know exactly how much money you have to budget each month. Even if you have variable income from ten different sources, you will still know exactly how much money you have available to budget because it’s all the money you earned last month. Budgeting with real numbers removes the guess work and really puts you in control.
You have a buffer just in case. Just this month we had an experience that made us extra grateful that we are living on last month’s income. I’ll write more details (and a warning) soon, but the bottom line is that Federal Loan Servicing automatically withdrew $697 this month. Our “amount due” is usually $0 since we are on income-based repayment and aren’t making enough to require payments right now. Apparently it was time to renew our qualifications for the program, but we didn’t know that. If we had not been living on last month’s income there would not have been enough money just sitting around in our checking account. We would have been kicked off the auto-payment program that lowers our interest rate by .25%.
Peace of mind and less stress about money. Having peace of mind may seem obvious after reading the other benefits, but I think it deserves its own attention. Feeling uptight about your finances all of the time is so emotionally draining and hard on relationships. It’s amazing how much less stress we feel not worrying about if we’re timing our bills right or if we’re over-estimating how much money we’ll make. Peace of mind is the biggest reason that I recommend living on last month’s income.
How can I start living on last month’s income?
You can start changing your mindset by only budgeting money you actually have. Budget each paycheck as you get it. The excellent YNAB classes will walk you through the steps on how to do it.
In order to live on last month’s income, you’ll have to save up a month’s worth of income. You can save by putting money aside each month. A tax return, bonus, or other windfall you can expedite the process. Of course, if you have a month’s worth of income just sitting around somewhere, you can start living on last month’s income right now.
A crucial part of living on last month’s income is having a reliable way to track what income you are “allowed” to use and what income is for next month. If you’re good with spreadsheets, you can create your own version of YNAB, but for us, even though we are quite handy with Excel, it was much simpler to use YNAB’s software (plus, it’s pretty).
If you are happy with your own spreadsheet or use another budgeting tool, I highly recommend watching the online YNAB classes anyway. They explain better and in greater detail some of the philosophical changes that have made such a difference to us in our budgeting.
If you’re looking for more guidance on living on last month’s income, you can get my Guide to Getting a Month Ahead for free!
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